One-Sided Arbitration Agreement Not Enforceable, Calif. Court Rules

A physician could not be forced to arbitrate his job-related claims against the medical group that employed him, the California Court of Appeals ruled, affirming the trial court's conclusion that the arbitration agreement contained in the doctor's employment contract was one-sided and unfair and was therefore unenforceable.

The agreement was "procedurally unconscionable," the court said, because the employment contract was offered to the employee on a "take-it-or-leave-it" basis, and the doctor was not told what rules would govern the arbitration. The agreement was "substantively unconscionable" because it contained two terms that favored the employer.

Arsen Hovanesyan is a licensed physician who began working for Glendale Internal Medicine and Cardiology Medical Group as a cardiologist on March 28, 2011. He signed a written nine-page employment agreement that contained a provision that "any and all disputes" arising out of the agreement "shall be resolved by final and binding arbitration as the exclusive remedy."

Hovanesyan was terminated on March 15, 2016. He sued Glendale Internal, alleging that he was wrongfully terminated, in violation of California law, when he complained about unsafe patient care and negligent medical practices and that the medical group had made false statements about him after his employment had ended.

Glendale Internal moved to compel arbitration of all claims pursuant to Hovanesyan's employment contract, but the trial court denied the motion, finding the arbitration agreement to be both procedurally and substantively unfair or "unconscionable." Glendale Internal appealed.

Procedural and Substantive Unconscionability Defined

Both federal and California law embrace a liberal policy favoring arbitration, and both procedural and substantive unconscionability must be present for a court to refuse to enforce an arbitration agreement, the appellate court first noted.

The court then defined procedural and substantive unconscionability as follows: "The procedural element addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power. Substantive unconscionability pertains to the fairness of an agreement's actual terms and to assessments of whether they are overly harsh or one-sided."

The court then noted that the ultimate issue in every case is whether the terms of the contract are "sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement."

The court found that there was substantial evidence to support the trial court's finding of procedural unconscionability. When Hovanesyan asked at the time of hire if he could discuss modifying any terms in the agreement, he was told he needed to sign it if he wanted to work for Glendale Internal; otherwise, Glendale Internal would "move on to the next applicant." He was also told that there were several other applicants interested in the job and that he should take or leave the agreement as it was because it was the only contract he would be offered.

This offer of the contract, which contained the arbitration clause, on a take-it-or-leave-it basis showed procedural unconscionability, the appellate court said. In addition, Hovanesyan was not given a copy of the rules that would govern the arbitration procedure or told where he could obtain a copy of those rules. "Numerous cases have held that the failure to provide a copy of the arbitration rules to which the employee would be bound supported a finding of procedural unconscionability," the court said.

The appellate court also agreed with the trial court that two provisions of the agreement rendered it substantively unconscionable:

It improperly imposed arbitration costs on the employee.

It contained a one-sided attorney fees provision.

Under California law, the court noted, if an employer requires an employee to arbitrate claims that arise under state and federal employment laws, the employer must pay all the cost of that arbitration. The agreement at issue provided that, should the employee lose at arbitration, he or she would be required to pay the costs of the arbitration. This type of provision creates "a sense of risk and uncertainty among employees that could discourage the arbitration of meritorious claims," the court said.

In addition, another provision of the agreement allowed for an award of attorney fees if one of the parties initiates a claim in court and the other party is successful in having that claim sent back to an arbitrator. The appellate court noted that, because it is only the employee who files a complaint in court and only the employer that seeks to force arbitration, the result of this provision is that an employer that is successful in compelling arbitration will get its attorney fees paid. However, if the employee is successful in opposing arbitration, there is no provision for the payment of the employee's attorney fees.

The appellate court affirmed the trial court's order refusing to compel arbitration of Hovanesyan's claims.

Professional Pointer: California courts often refuse to enforce arbitration agreements on the grounds of unconscionability. To ensure enforceability, all arbitration agreements should be carefully drafted and reviewed by counsel.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.

Was this article useful? SHRM offers thousands of tools, templates and other exclusive member benefits, including compliance updates, sample policies, HR expert advice, education discounts, a growing online member community and much more. Join/Renew Now and let SHRM help you work smarter.